Defense contractors are confident about fiscal 2011 budget

The panic pervasive in the defense industry a year ago has largely subsided as officials await an fiscal 2011 Pentagon spending request that most budget watchers expect will not include the program terminations and deep cuts that made fiscal 2010 a major turning point for many firms that do business with the military.

Industry officials and outside analysts will undoubtedly eye the defense budget and the accompanying Quadrennial Defense Review of military priorities and capabilities for any new investment areas or shifting procurement priorities.

But most say they feel they have a read on the administration, now in its sophomore year, and feel confident that top officials are prepared to invest in defense -- even if that amounts to more modest annual increases than those enjoyed during the Bush years.

Sources say they view the fiscal 2010 cuts, now a painful memory, as a seismic shift intended to change the Pentagon's course. A repeat of last year, they said, is neither likely nor necessary.

"It's probably never over -- whether it's a thousand cuts or one big one, I think one always wonders what's out there," one defense industry source recently said.

But the source, who, like many in the defense industry, has been scrambling to learn details of the Obama administration's closed-door budget negotiations, said the prevailing thought within industry is that Defense Secretary Robert Gates laid out his major programmatic changes and cuts in last year's request.

The budget request, as well as the QDR, are expected to be an outgrowth of that fiscal 2010 request, which focused on ending problematic or unnecessary programs in favor of funding technologies deemed more critical to operations in Afghanistan and Iraq or essential to providing a hedge against future threats.

Industry sources said they don't anticipate many major new program starts in the fiscal 2011 request and only a modest uptick in the base defense budget. And much of that increase will likely be spent to pay for rising personnel and healthcare costs instead of buying new weapons systems.

But there are some areas that could see increased investments, including unmanned aerial vehicles -- one of Gates' favorite technologies -- as well as directed energy, short- and mid-range missile defenses and cybersecurity programs.

There is "some concrete anticipation that you'll see investment in those areas," the industry source said.

One long-suffering sector of the defense industry -- shipbuilders, who have faced erratic budgets over the last several years -- are hoping for stability and at least a $15 billion investment for next year, said Cindy Brown, president of the American Shipbuilding Association.

The industry, Brown says, hopes the Pentagon maintains the requirement that the Navy field 12 aircraft carriers. They also believe the Navy will commit to investing in research and development of a replacement for Ohio-class submarines, which are set to begin retiring in the late 2020s.

Another industry source closely tracking the budget said battlefield communications technology -- down to the level of the individual soldier -- could get a heavy investment in the fiscal 2011 budget.

Meanwhile, troop increases in Afghanistan could mean more money spent on vehicles, generators, transport aircraft and helicopters, as well as innovative solutions to key problems such as improvised explosive devices and energy use, according to an analysis released Tuesday by Deloitte's aerospace and defense sector.

"The bottom line is ... are you in a fast current?" the second industry source said. "Do you have the program that's going to be paying dividends? And if you are, you're good."

The QDR, essentially a planning document, could shed some light on which firms will be riding a fast current. Past QDRs have delineated new spending and offered rationales for launching of ambitious long-range programs.

But the much-anticipated quadrennial reviews traditionally include scarcely a mention of defense industry or industrial base concerns -- a fact that industry officials believe will change this time.

"At this point, we are cautiously optimistic that this QDR will be different and ... will actually take into account to some degree the issue of we must maintain the human capital, the expertise, the facilities and the resources to address future threats," said Marion Blakey, president of the Aerospace Industries Association. "And as a result, those kinds of factors are going to have to be part of our strategy, not just what we need for the immediate conflicts we are involved in."

In an unusual move just weeks before the release of the budget and the QDR, Gates and two other senior Pentagon officials met with AIA and leaders from top aerospace firms behind closed doors last week.

Blakey, who attended the meeting but would not discuss the details, said she viewed it as a "positive sign" of the administration's desire to reach out to industry. "The administration is showing a willingness to approach the defense needs of the country as a real partnership, where we are able to work together in a way really that I don't think we have seen in recent years, and this is a really encouraging thing," Blakey said.